What is the risk of financing?
The risk of financing is the possibility that the company does not have to have access to the financing it needs at an affordable rate. It usually plans to use a combination of capital and credit financing to finance operations. The cost of financing is the interest that the company has to pay for securing external funds. Business can predict a future interest rate only from the source of funds. The risk that the credit market can change and funds are more expensive, the risk of financing in the company's financing plan.
businesses borrow money just like individuals. Biddated funds or loan can pay for supplies, help the business to perform wages or allow it to buy equipment or equipment. Whenever the company borrows money, the creditor determines the interest rate, which is an additional amount that must be paid above the refunded amount of the principal. Interest paid on borrowed money is the cost of business when using this source of financing.
There is a series of Ways BusiNess can finance operations with borrowed funds. Can take a loan from a bank or open a credit line. Some sellers are expanding the credit conditions of enterprises that allow them to make purchases, but pay later. Public corporations can also borrow money from the public by issuing bonds.
All these sources of borrowed funds charge a different interest rate for extending the loan. Interest rates can be determined at a time when the loan is provided or may vary regularly, how market conditions and changes in the economy. Some sources of funds associate their interest rates with a certain general standard, such as the interest that the government charges for its government bonds. For example, the credit interest, which is set in such a way, may require three percentage points above the government's interest rate.
business can never know what the cost of lending funds is. Mane make a reasonable estimate on the basis of current conditions. However, sudden economic changes may be obsolete and the necessary financing can be much more expensive to obtain. The possibility that this may happen is the risk of financing that owns any business scenario that requires financing.
Financing costs usually affect the business flow of the company. For example, if an enterprise needs a loan to finance a new project and a change in interest rates between the time when a loan was discussed, and at a time when it actually closes, the project can endanger the project. Businesses seek to minimize the risk of financing to as much as possible by available more sources of loan. The operation of a company with several sources of fixed rate is considered to be a high risk of financing.